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Title: Predictability of China Stock Market Return and Its Variance Decomposition: An Accounting-Based Present-Value Approach
Source: International Conference on Engineering and Business Management 2012(Part 4 Urban Management and Financial Investment) (pp 2847-2851)
Author(s): Weihong Cai, School of Economics, Huazhong University of Science and Technology, Wuhan, China, 430074;School of Trade and Economics, Guangdong University of Foreign Studies, Guangzhou, China, 510006
Qiming Tang, School of Economics, Huazhong University of Science and Technology, Wuhan, China, 430074
Abstract: This paper uses a vector autoregressive model(VAR) to predict stock market return and decompose its expected return variance. Based on accounting valuation model, the VAR links the excess stock returns to profitability and book-to-market ratio. This approach avoids modeling the potentially unstable dividend process. The VAR yields two main results. First, profitability is not better than dividend for return predictability. Second, fluctuating stock market valuations are primarily driven by variation in risk premia.
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